Working Paper

A New Measure of Climate Transition Risk Based on Distance to a Global Emission Factor Frontier

Abstract: Targeted financing of transition to a "net zero" global economy entails climate transition risk. We propose a measure of transition risk at the country-sector dyad level composed of five tiers of transition risk based on two factors: i) the gap between a dyad's existing emission factor (EF) -- a measure of the greenhouse gas intensity of output -- and the global 'frontier' sectoral EF, and ii) a dyad's recent convergence towards the frontier EF. Dyads that are either close to the frontier or converging towards the frontier carry lower transition risk. Our measure, using 45 sectors across 66 countries, accounts for both direct greenhouse gas emissions as well as those that enter into production through complex supply chains as captured by intercountry, input-output tables, and can be applied at different levels of stringency to high-, middle-, and low-income economies. Our measure thus accounts for, and sheds light on, EF reductions through investment in lower emissions production techniques in own facilities as well as sourcing intermediate inputs with lower embodied emissions.

Keywords: Transition risk; Greenhouse gas emissions; Direct emissions; Production emissions; Convergence;

JEL Classification: E16; G10; Q54;

https://doi.org/10.17016/FEDS.2024.017

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2024-04-09

Number: 2024-017